SAN FRANCISCO (Reuters) - Microsoft Corp withdrew its offer for Yahoo Inc on Saturday as negotiations fell through on price, even after the software giant raised its bid by about $5 billion to $47.5 billion.

Microsoft Chief Executive Steve Ballmer said his company increased its offer to $33 per share, from the $31 per share cash-and-stock bid that it initially made on January 31. But Yahoo was looking for $37 a share, Ballmer said.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Ballmer said in a statement.

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said Ballmer.

Yahoo was not immediately available for comment.

Laura Martin, a senior analyst at Soleil Securities, said Yahoo was demanding too high a price and she expected its shares to fall $8 on Monday when trading resumes on the Nasdaq. The shares closed up nearly 7 percent at $28.67 on Friday on hopes of an agreement between Microsoft and Yahoo.

"The Yahoo guys want too much money for their company. We think $33 a share is fair in the context of the weakening economic environment and adverse advertising trends," Martin said, who has a "hold" rating on Yahoo shares.

"I think you'll see a number of shareholder lawsuits on Monday. They've prioritized employees over shareholders in the hopes that someday they can create more than $8 billion of value, even if they have no track record of doing so," she said.

Yahoo had previously refused to enter formal negotiations with Microsoft, saying the initial price it made public in February did not properly value Yahoo's search and display advertising technology, or its overseas holdings.

Yahoo has also courted a possible deal with Time Warner Inc's AOL Internet division and a search advertising partnership with Google Inc.

In a letter to Yahoo Chief Executive Jerry Yang, Ballmer said he was concerned such plans would hurt Yahoo's own search and display advertising strategies, and impair its ability to retain talented engineers.

"We regard with particular concern your apparent planning to respond to a "hostile" bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today," he said.

"In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo undesirable to us," Ballmer said in his letter, made public on Saturday.

Microsoft wants to buy Yahoo to gain a stronger foothold in its battle with Web search leader Google, which is rapidly expanding into the software maker's own turf with new Web-based applications.

Yahoo's advisers had initially said it would not negotiate with Microsoft for anything less than $40 a share, a person familiar with Microsoft's thinking said. But amid threats by Microsoft to launch a hostile takeover, Yahoo CEO Jerry Yang suggested a price of $38 a share, the person said.

On Saturday, Yang and Yahoo co-founder David Filo met Ballmer and Microsoft's Platforms & Services Division President Kevin Johnson in Seattle, where they communicated that Yahoo's board was willing to cut a deal at $37 a share, although the two co-founders remained committed to a dollar more per share, the source said.

(Additional reporting by Michele Gershberg, Kenneth Li and Tiffany Wu in New York, editing by Doina Chiacu)